Wash Sale Losses

Many tax preparers and taxpayers struggle with wash sale loss rules

Wash-sale loss rules

Per IRS Publication 550: “A wash sale occurs when you (a taxpayer) sell or trade stock or securities at a loss and within 30 days before or after the sale you:

  • Buy substantially identical stock or securities,
  • Acquire substantially identical stock or securities in a fully taxable trade,
  • Acquire a contract or option to buy substantially identical stock or securities, or
  • Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.”

Wash-sales reported on 1099-Bs.

Broker 1099-Bs report “wash sale loss disallowed” (box 1g), and it’s not uncommon to see an enormous amount for an active securities trader. The 1099-B also reports “proceeds” (box 1d), “cost or other basis” (box 1e), and several other related amounts. For example, $10M proceeds minus $9.9M cost or other basis, plus $150,000 of wash sale loss disallowed, equals $250,000 of taxable capital gains. The 1099-B cover page has summary numbers, and supplemental schedules include each securities trade for all of these boxes.

The essential point is that WS loss disallowed in box 1g is for the entire tax year. However, WS losses deferred at year-end cause phantom income in the current tax year. Many WS losses during the year might fade away by year-end (more on this later). Unfortunately, brokers do not report WS losses deferred at year-end, and clients need that information. If a trader uses trade accounting software, they need this information to reverse WS loss deferrals from the prior year-end on January 1 of the current tax year.

For example, two different traders can have $1M of WS loss disallowed in box 1g. Trader A doesn’t have WS losses at year-end, and she is not concerned with those adjustments during the year. She sold all open positions by year-end and did not repurchase substantially identical positions in January. Trader B also sold all positions by year-end, but he made repurchase trades in January, which triggered $50,000 of WS losses deferred at year-end. Trader B delayed the December WS loss to the subsequent tax year.

Traders need ongoing WS loss information throughout the year to prevent this predicament. Some monthly brokerage statements include cost basis amounts for month-end open positions listed on the report, and other monthly brokerage statements do not.

Most traders don’t realize they have a WS loss problem until they receive 1099-Bs in late February. That’s too late to avoid WS losses.

Many traders and tax preparers who are not well-versed in the rules may leap to import 1099-Bs into tax software, but they will probably not comply with taxpayers’ rules.

We implore Congress and the IRS to address these structural conflicts in the wash-sale rules. I had hoped Congress would consider changes as part of tax reform discussions in 2017, but TCJA did not address these issues.

Strategies to avoid wash-sale losses on securities

See our blog post How To Avoid Taxes On Wash Sale Losses.